KARACHI, June 14: The 2004-05 budget seeks to give boost to investment and economic growth. But the government and the State Bank will have to show a greater degree of fiscal and monetary prudence to ensure that the budget meets these objectives.

Containing inflation will be the greatest challenge for the government and the SBP without compromising on their resolve to attain a 6.6 per cent growth rate. But it will not be an easy task.

Keeping inflation under check through fiscal measures seem to be too difficult for the government at a time when it is set to relax fiscal discipline for the sake of higher growth. Similarly, if the SBP goes for tightening monetary policy to keep inflation from rising beyond the targeted level of 5 per cent the interest rates that have already started moving up would rise further.

That in turn would increase the financial cost of doing business. And if it continues to maintain a stable monetary policy stance that itself is next to impossible because the interest rates have already started rising then inflation would keep shooting-much to the chagrin of the poorer sections of population.

Depressing inflationary sentiments would be a must in this fiscal year also to discourage hoarding and inventory building by businesses taking advantage of the low lending rates.

Pre-payment of external debts by the government as well as the corporates amidst rising trade deficit and falling remittances from overseas Pakistanis has also started devaluing the rupee.

In the next fiscal year the government will have to allow the rupee to continue to fall thus benefiting exporters whose contribution to GDP growth is vital. But if this option is exercised then containing inflation by tightening of monetary policy will become difficult.

Another big challenge in fiscal 2004-05 will be to ensure full utilization of a record Rs202 billion allocation for public sector development programme in a corruption-free environment.

Pakistan is known for under-utilization of its development programme due to bureaucratic snags and keeping the programme free of corruption has always been a dream unfulfilled.

BANKING SECTOR: Top bankers say that the budget should have a positive impact on the banking sector provided that it is backed up fiscal and monetary prudence.

"The (budgetary) measures are likely to have a positive impact on the banking sector," says National Bank of Pakistan President Syed Ali Raza. "With greater economic activity the demand for credit will increase," he explains.

Union Bank Chairman Mr Shaukat Tarin who heads Pakistan Banks Association also says that the budgetary incentives to bolster investment "will provide further opportunities for the financial institutions."

Tarin hopes that fiscal and monetary prudence will continue and "inflation will be kept under control so that mark up rates do not go up significantly-or else we would affect the overall business sentiment," he warns.

Mr. Tarin says that the lowering of bank related taxes will help improve the profitability of the financial institutions. "Reformation of the Pension and National Saving Schemes will provide opportunities to the banks and financial institutions to build asset management businesses."

"Such large pool of resources can be channelled towards creating new business opportunities and restructuring of distressed assets." It will remove the distortion from the market in terms of profits being offered for the same tenor deposits," he adds.

Syed Ali Raza says that "as work on documentation of ownership of properties picks up, banks that were earlier apprehensive in lending to housing sector would now have greater confidence in the system."

Availability of home finance from commercial banks has been one of the factors that has contributed to the boom in construction industry. It can further increase "due to removal of "the existing constraints in this lending." But like other bankers Raza also warns that "increased demand for credit could put upward pressure on interest rates."

Former Chairman of Pakistan Banks Association Mr. Zubyr Soomro is all praise for the budget 2004-05. he says that the budget seeks to resolve long standing issues of the financial sector. He particularly mentions the following ones:

(i) Restoration of the "own estimate" scheme for paying advance tax: The Finance Act 1997 changed this to a turnover based calculation where advance tax was to be paid based on the tax/turnover ratio of the last finalized assessment.

"This was unfair, particularly for those companies that, due to adverse circumstances were making a loss and still had to pay large amounts of advance tax." Restoration of the original scheme "will be a boon to the entire economy."

(ii) Removal of the requirement of payments in advance in cases of appeal against tax assessment.

(iii) Proposal for setting up alternative dispute resolution mechanism. "This already exists for sales tax issues and has worked well. This should help in clearing the huge backlog of income tax cases and appeals...and should provide more expeditious relief to assesses."

(iv) Clarification of many ambiguities/inconsistencies in the Income Tax Ordinance.

(v) Reinforcement of the incentives to the growth of the housing sector including the permission.

One of these incentives is that the budget seeks to allow non-bank finance institutions also to set aside up to 3 per cent of their consumer loans in the reserves as a cushion against defaults.

The chairman of Leasing Association of Pakistan Mr Basheer A. Chawdry has also appreciated this move. "Earlier only banks were allowed to do this. By extending the scope of this facility to NBFIs the government has provided a level playing field to them," he said. He also appreciated the budget proposal paving the way for registration of new modaraba companies.